With gold prices on the rise, several gold-bullion investment vehicles are sprouting up in Canada, the U.S. and Australia.
In Canada, the managers behind North America’s only publicly traded bullion fund,
In its preliminary-prospectus filing (available at www.sprott.ca), Gold-Trust says its objective is to provide a “secure, convenient, low-cost and low-risk investment alternative for investors interested in holding gold bullion.”
The units will be priced at C$20 each, with Gold-Trust investing at least 90% of the net proceeds in 400-oz. bars of physical gold. These will be stored on an unencumbered, allocated and segregated basis in the treasury vaults of CIBC in Canada.
The balance will be invested in gold certificates and cash-related securities in order to meet redemptions.
Gold-Trust has applied for a Toronto Stock Exchange listing with a proposed ticker symbol of cgt.un, and expects to be publicly trading within a month or so. Beyond that, the trust may seek a further listing in the U.S.
While most investors will opt to dispose of their units by selling into the market, the units will be redeemable at any time for either 90% of the market price of the last 10 trading days or the last closing price, whichever is less.
Unlike physical gold held directly by a Canadian individual, the Gold-Trust units will be eligible for Canadian registered retirement savings plans, registered retirement income funds, deferred profit-sharing plans, and registered education savings plans.
Gold-Trust does not anticipate making regular distributions on its units.
Central Fund President and CEO Stefan Spicer will be president of Gold-Trust, and Gold-Trust’s co-chairmen will be Philip Spicer, chairman and founder of the Central Fund (and Stefan’s father), and John Embry, who will soon become president of the Sprott subsidiary Sprott Asset Management.
(Until Embry’s departure for Sprott earlier this year, he was the portfolio manager of RBC’s flagship $2.9-billion Royal Canadian Equity Fund and the best-performing mutual fund in North America, RBC’s Royal Precious Metals Fund. At the latter fund, Canada’s largest gold mutual fund, Embry posted a 153% return in 2002 by studiously avoiding hedged gold producers, though, since Embry left, the Royal fund has added two hedgers, Placer Dome and Barrick Gold, to its top 10 holdings.)
Independent consultant William Trench will be Gold-Trust’s chief financial officer, and lawyer John Elder will be secretary.
In addition to the Spicers and Embry, Gold-Trust’s remaining trustees will be: Eric Sprott, chairman and chief investment officer of Sprott Asset Management; Brian Felske, a mining consultant; Douglas Heagle, chairman of investing firm NSBL International; Ian McAvity, president of economic consultants Deliberations Research; and corporate director Robert Sale.
Only the independent trustees will receive US$4,000 per year, plus US$1,000 per meeting or inspection.
Gold-Trust’s head office will be in the Spicers’ hometown, Ancaster, Ont., (just west of Hamilton), and the new trust will be administered by the Spicer-family-held firm Central Gold Managers, which will be paid a declining fee equivalent to 0.4% per year for the first US$100 million of Gold-Trusts’ total assets, 0.3% per year for any excess up to US$200 million, and 0.2% per year for any excess above US$200 million.
Sprott Asset Management will serve as Gold-Trust’s advisor and marketer, and be paid a fee equal to half of all fees paid to Central Gold Managers.
A syndicate of brokers led by CIBC World Markets and RBC Capital Markets is marketing the offering on a best-efforts basis, and the pair has been granted an over-allotment option, exercisable for two weeks after closing, to buy up to 15% of the aggregate number of units sold at closing, at the offering price of C$20.
Separately, Sprott Asset Management has already agreed to buy at least C$5-million worth of units.
The Central Fund has a different focus in that it holds both gold and silver bullion. As of Feb. 14, Central Fund held 297,045 fine ounces of gold, 14.8 million oz. silver and US$4.6 million in cash and equivalents.
The Central Fund is tightly held by the Spicer family, which owns 49% of the 40,000 common shares, which can be voted on, and about 110,700 of the non-voting class A shares, which now number 44.7 million following a US$24.5-million private placement that closed in February (T.N.M., Feb. 3-9, 2003).
Stefan Spicer is not sure if the new trust will be larger than the Central Fund, which had a market capitalization of C$268 million at presstime and was trading at a 15-20% premium to spot bullion prices.
“The market has been asking for a gold-only product for two or three years now,” says Spicer. “Investors have seen that gold is a proven, time-tested portfolio diversifier.”
He lists several advantages to the proposed structure for Central Gold-Trust: there are no requirements to pay an ongoing dividend, though there may be incidental ones; it would not be subject to large-corporations taxes; it is self-governing; and there will be no employees, stock-option plans or debt.
In a broader sense, vehicles such as Gold-Trust are able to achieve economies-of-scale unattainable by most private investors, and so are able to buy and sell near the spot gold price and minimize storage fees.
As well, an investor who buys and sells units, rather than the underlying commodity, is taxed more favourably.
Regarding the new gold-bullion vehicle being sponsored by the World Gold Council, Spicer says “investors need to be mindful that the Gold Council has proposed a product, and that if they sit back and say ‘let’s just wait and see what happens with the Gold Council product,’ they could end up leaving themselves naked for a period of months and not participating in the gold market until that product is refined and comes to market.”
Overall, Spicer says he welcomes other gold-bullion products: “Any investments that are brought forward to focus investors’ attention on the ownership of precious metals, at what I view to be the early stage of a major trend change, [create] favourable sentiment that will inevitably rise.”
With Central Fund being created in 1961, Spicer says “we’ve proved to the markets we can ‘family-steward’ investors’ assets with integrity and honour for 42 years. You can see that as one of the risk factors in the Council’s product — that they don’t have experience in this area.”
The World Gold Council subsidiary World Gold Trust Services registered in May with the U.S. Securities and Exchange Commission for the first U.S.-traded gold-bullion trust, named “Equity Gold Trust.” It will trade on the New York Stock Exchange using the ticker gld, and it is also expected to appear on the London and Tokyo stock exchanges, with possible listings in Toronto and Johannesburg. The registration was for 60.4 million shares valued at a maximum US$2 billion, or about 5.4 million oz. gold.
Each of the Equity Gold Trust’s shares will represent one-tenth of an ounce of gold, with the net asset value to be determined daily based on the London PM gold fix.
UBS Warburg is the sole underwriter and co-ordinator of the trust, and has agreed to sign on for US$50-million worth of units.
Gold will be allocated and stored in HSBC’s vaults in London. HSBC Bank USA will act as trustee and custodian of the trust, with trustee fees set at 0.12% annually for the first US$10 billion plus 0.1% for any amount over US$10 billion.
Creation and redemption of Equity Gold Trust shares will only be allowed in minimum amounts of 10,000 oz., or “baskets” currently worth about US$3.7 million.
The unveiling of the Equity Gold Trust is widely seen as a triumph for Council Chairman and former Gold Fields CEO Chris Thompson, who has steered the council over the past couple of years into supportin
g the view that gold is an investment and not just adornment.
However, there are still some significant hurdles to jump:
q The trust has applied to the Internal Revenue Service for exemption for IRAs buying since gold is treated in the U.S. as a collectible that results in a taxable distribution.
q Because gold is deemed a collectible, U.S. citizens would also pay a maximum 28% long-term capital-gains tax rather than the usual 20% for most other long-term capital gains (i.e. more than one year).
q Non-U.S. residents could be liable for U.S. estate taxes than can be as high as 49% of the fair-market value of the asset, and could also be subject to U.S. gift taxes. (In its filing, the trust urges non-U.S. shareholders to consult their tax advisors on these matters.)
q The fund could face termination if its net asset value falls below US$350 million.
q The filing reveals there is a “major third-party financial institution” that may take legal action against the World Gold Council after being rebuffed as trustee. This institution is also making “certain claims of infringement of intellectual property.”
(Additional information can be found at www.equitygoldshares.com)
Meanwhile in Australia, two open-ended gold-bullion products have made their appearance in recent months.
The first out of the gates was a gold-backed security launched in late March by Melbourne-based Gold Bullion, which was created by Australia’s Investor Resource and the World Gold Council, with input from the Australia Gold Council.
Using the ticker gol on the Australian Stock Exchange, each security is worth one-tenth of an ounce of gold. The management fee is 0.02% daily, or roughly 1% after four years.
Sales have been brisk: In the first month, investors acquired the equivalent of 28,143 oz. gold in securities worth about A$15 million, and by mid-May the trust held 61,000 oz. gold worth about A$34 million, with most of the buyers hailing from North America and Europe.
Average daily turnover has been about A$800,000, and the security has traded at a 1% premium to the spot gold price.
Chairman Graham Tuckwell points out that Gold Bullion investors own a specific portion of a gold bar held in a London vault of HSBC, rather than a promise by a bank or other party to pay in gold.
(More information can be found at www.goldbullion.com.au)
The second Aussie gold vehicle, dubbed the “Perth Mint Gold Quoted Product” or PMG, was launched in mid-May by Gold Corp, the operator of Western Australia’s Perth Mint.
The PMG, which trades on the Australian Stock Exchange using the ticker zauwba, is a warrant entitling the holder to one-hundredth of an ounce of fine gold. The gold is stored at the Perth Mint and guaranteed by the Western Australian government. Investors who exercise their warrants before 2014 may take delivery from the Perth Mint in either gold bars or coins.
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